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promise as binding. It is legally acceptable and it is up to each Islamic bank to take either opinion according to what its committee of legal observers decides.
C. Various types of Murabaha
Murabaha is one of the most widely used modes of finance by the Islamic banks. It is suitable for partial financing to the investment activities of the
customers, in industry, trade or others. It enables the customerinvestor to obtain finished goods, raw material, machines or equipment from the local market or
through import. Payment for a murabaha may be done either in cash or installments. Under
a murabaha, it is permissible for a seller to set different prices for different payment modes. Murabaha muajjal is characterized with the goods being
delivered at the beginning of the contract and the payment being made at a later time some time after the contract, either in a cash lump sum or installments.
Murabaha can be classified into three types, namely:
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1. Murabaha Taqsith - in installments
Figure 1 : Murabaha Taqsith
43
Karim, Adiwarman, Islamic Banking Fiqh, pg 117
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2. Murabaha Mu‟ajjal - lump sum at the end of the period
Figure 2: Murabaha Mu‟ajjal
3. Murabaha Naqdan - in cash
Figure 3 : Murabaha Naqdan
D. Essential Principles and conditions of murabaha
Murabahah as a mode of financing
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Originally, murabahah is a particular type of sale and not a mode of financing. The ideal mode of financing according to Shariah is mudarabah or
musharakah; however, in the perspective of the current economic set up, there are certain practical difficulties in using mudarabah and musharakah instruments in
some areas of financing. Therefore, the contemporary Shariah experts have allowed, subject to certain conditions, the use of the murabahah on deferred
payment basis as a mode of financing. But there are two essential points which must be fully understood in this respect:
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Muhammad Taqi Usmani, An Introduction to Islamic Finance, Maktaba MA‟ARIF
KARACHI 2002 pg 104
43
1. It should never be overlooked that, originally, murabahah is not a mode of financing. It is only a device to escape from interest and not an ideal
instrument for carrying out the real economic objectives of Islam. Therefore, this instrument should be used as a transitory step taken in the process of the
Islamization of the economy, and its use should be restricted only to those cases where mudarabah or musharakah are not practicable.
2. The second important point is that the murabahah transaction does not come into existence by merely replacing the word of interest by the words of
profit or mark-up. Actually, murabahah as a mode of finance has been allowed by the Shariah scholars with some conditions. Unless these conditions
are fully observed, murabahah is not permissible. In fact, it is the observance of these conditions which can draw a clear line of distinction between an
interest-bearing loan and a transaction of murabahah. If these conditions are neglected, the transaction becomes invalid according to Shariah.
Basic features of Murabahah Financing:
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1. Murabahah is not a loan given on interest. It is the sale of a commodity for a
deferred price which includes an agreed profit added to the cost.
2. Being a sale, and not a loan, the murabahah should fulfil all the conditions necessary for a valid sale, especially those enumerated earlier in this chapter.
3. Murabahah cannot be used as a mode of financing except where the client needs funds to actually purchase some commodities. For example, if he wants
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http:www.kantakji.comfiqhFilesFinanceMurabaha.htm
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funds to purchase cotton as a raw material for his ginning factory, the Bank can sell him the cotton on the basis of murabahah. But where the funds are
required for some other purposes, like paying the price of commodities already purchased by him, or the bills of electricity or other utilities or for
paying the salaries of his staff, murabahah cannot be effected, because murabahah requires a real sale of some commodities, and not merely
advancing a loan. 4. The financier must have owned the commodity before he sells it to his client.
5. The commodity must come into the possession of the financier, whether physical or constructive, in the sense that the commodity must be in his risk,
though for a short period. 6. The best way for murabahah, according to Shariah, is that the financier
himself purchases the commodity and keeps it in hisshe own possession, or purchases the commodity through a third person appointed by himher as
agent, before heshe sells it to the customer. However, in exceptional cases, where direct purchase from the supplier is not practicable for some reason, it
is also allowed that heshe makes the customer himselfherself hisher agent to buy the commodity on hisher behalf. In this case the client first purchases the
commodity on behalf of his financier and takes its possession as such. Thereafter, heshe purchases the commodity from the financier for a deferred
price. Hisher possession over the commodity in the first instance is in the capacity of an agent of his financier. In this capacity heshe is only a trustee,
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while the ownership vests in the financier and the risk of the commodity is also borne by him as a logical consequence of the ownership. But when the
client purchases the commodity from his financier, the ownership, as well as the risk, is transferred to the client.
7. As mentioned earlier, the sale cannot take place unless the commodity comes into the possession of the seller, but the seller can promise to sell even when
the commodity is not in his possession. The same rule is applicable to Murabahah.
8. In the light of the aforementioned principles, a financial institution can use the Murabahah as a mode of finance by adopting the following procedure:
Firstly: The client and the institution sign an over-all agreement
whereby the institution promises to sell and the client promises to buy the commodities from time to time on an agreed ratio of profit added to the cost.
This agreement may specify the limit upto which the facility may be availed.
Secondly:
When a specific commodity is required by the customer, the institution appoints the client as his agent for purchasing the commodity
on its behalf, and an agreement of agency is signed by both the parties.
Thirdly: The client purchases the commodity on behalf of the
institution and takes its possession as an agent of the institution.
Fourthly:
The client informs the institution that he has purchased the commodity on his behalf, and at the same time, makes an offer to purchase it
from the institution.
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Fifthly:
The institution accepts the offer and the sale is concluded whereby the ownership as well as the risk of the commodity is transferred to
the client. All these five stages are necessary to effect a valid murabahah. If the
institution purchases the commodity directly from the supplier which is preferable it does not need any agency agreement. In this case, the second
phase will be dropped and at the third stage the institution itself will purchase the commodity from the supplier, and the fourth phase will be restricted to
making an offer by the client. The most essential element of the transaction is that the commodity must remain in the risk of the institution during the period
between the third and the fifth stage. This is the only feature of murabahah which can distinguish it from an interest-based transaction. Therefore, it must
be observed with due diligence at all costs, otherwise the murabahah transaction becomes invalid according to Shariah.
9. It is also a necessary condition for the validity of murabahah that the commodity is purchased from a third party. The purchase of the commodity
from the client himself on buy back agreement is not allowed in Shariah. Thus murabahah based on buy back agreement is nothing more than an
interest based transaction. 10. The above mentioned procedure of the murabahah financing is a complex
transaction where the parties involved have different capacities at different stages.
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a
At the first stage, the institution and the client promise to sell and purchase a commodity in future. This is not an actual sale. It is just a promise to
effect a sale in future on murabahah basis. Thus at this stage the relation between the institution and the client is that of a promisor and a promise.
b At the second stage, the relation between the parties is that of a principal
and an agent.
c
At the third stage, the relation between the institution and the supplier is that of a buyer and seller.
d
At the fourth and fifth stage, the relation of buyer and seller comes into operation between the institution and the client, and since the sale is
affected on deferred payment basis, the relation of a debtor and creditor also emerges between them simultaneously.
All these capacities must be kept in mind and must come into operation with all their consequential effects, each at its relevant stage, and
these different capacities should never be mixed up or confused with each other.
11. The institution may ask the client to furnish a security to its satisfaction for the prompt payment of the deferred price. He may also ask him to sign a
promissory note or a bill of exchange, but it must be after the actual sale takes place, i.e. at the fifth stage mentioned above. The reason is that the promissory
note is signed by a debtor in favour of his creditor, but the relation of debtor
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and creditor between the institution and the client begins only at the fifth stage, whereupon the actual sale takes place between them.
12. In the case of default by the buyer in the payment of price at the due date, the price cannot be increased. However, if he has undertaken, in the agreement to
pay an amount for a charitable purpose, as mentioned in the rules of Bai Muajjal, he shall be liable to pay the amount undertaken by him. But the
amount so recovered from the buyer shall not form part of the income of the seller the financier. He is bound to spend it for a charitable purpose on behalf
of the buyer.
CHAPTER III ISLAMIC BANKING IN INDONESIA
